Einhorn Adds Short Bets as Markets Rally Amid Economic Slump

“The domestic economy has slowed down,” David Einhorn, president and co-founder of Greenlight Capital Inc., said today. “U.S. GDP went negative in the fourth quarter and
earnings growth has all but come to a halt.” Photographer: Scott Eells/Bloomberg

Feb. 20 (Bloomberg) -- Hedge-fund manager David Einhorn
reduced bets that stocks will rise as equities climbed to a
five-year high while U.S. economic growth halted.

“As the market continues to advance, even as the economy
doesn’t, we tend to become less enthusiastic,” Einhorn said on
a conference call today held by his Greenlight Capital Re Ltd.
reinsurer. “We took some gains in our long portfolio and added
to our shorts.”

U.S. gross domestic product shrank at a 0.1 percent annual
rate in the fourth quarter, the first decline since 2009, as a
plunge in defense spending swamped gains for consumers. The
Standard & Poor’s 500 Index has surged 7.3 percent this year
through yesterday after corporate profits reached a record. The
benchmark gained 13 percent in 2012.

Einhorn, 44, said long positions, or bets on rising asset
prices, exceeded short wagers by 29 percentage points as of Jan.
31, down from 39 percentage points at the start of the year.

Greenlight Re’s profitable long positions, or bets on
rising stocks, in 2012 included Apple Inc., General Motors Co.
and Sprint Nextel Corp. Apple and GM are among the firm’s
largest long holdings, he said.

Short positions hurt Greenlight Re’s performance last year,
he said. The portfolio returned 7.1 percent in 2012, lagging
behind gains in U.S. stocks and corporate bonds.

“This was a disappointing result in a generally favorable
investing environment,” Einhorn said. “Our investment returns
were pedestrian.”

Einhorn and his hedge fund Greenlight Capital Inc. are
known for shorting Lehman Brothers Holdings Inc. before it
collapsed in September 2008.

Credit Raters

Results last year were hurt by a bet that Moody’s Corp.
would fall. The provider of bond ratings jumped 49 percent in
2012. Still, Einhorn is wagering that legal scrutiny of rival
Standard & Poor’s, part of McGraw-Hill Cos., makes both McGraw-Hill and Moody’s vulnerable to declines. He’s short both
companies, he said today, and has also bet against Green
Mountain Coffee Roasters Inc. and companies sensitive to a
decline in iron ore prices.

Einhorn’s pessimism on U.S. stocks contrasts with bets by
Ray Dalio’s $140 billion hedge fund Bridgewater Associates LP.
Bridgewater, the world’s biggest hedge fund, is bullish on
stocks, oil and commodities, as it expects cash to shift to
riskier asset classes amid increased economic confidence. David
Tepper, who runs the $15 billion hedge fund Appaloosa Management
LP, and Carlyle Group LP co-founder David Rubenstein have said
they’re positive on the U.S. economy.

Equity Inflows

Investors, who pulled almost $300 billion out of stock
funds since the market bottomed, pumped $37 billion into equity
funds in January, the most since 2004, estimates from the
Washington-based Investment Company Institute show. Technology
companies and financial institutions received the biggest
inflows, according to data from Birinyi Associates Inc., the
Westport, Connecticut-based investment adviser.

Still, profit growth moderated after a three-year increase.
Quarterly earnings grew 3.6 percent on average in 2012, compared
with 28 percent the previous two years, data compiled by
Bloomberg show. Analysts project a 1.5 percent contraction in
first-quarter profits and 6.7 percent growth for 2013, according
to estimates tracked by Bloomberg.

‘Slowed Down’

“The domestic economy has slowed down,” Einhorn said
today. “U.S. GDP went negative in the fourth quarter and
earnings growth has all but come to a halt.”

The S&P 500 dropped 1.2 percent at 4:05 p.m. in New York,
the biggest fall since November. Greenlight Re fell 1.4 percent
to $24.57 after posting a fourth-quarter loss yesterday as
investments faltered and superstorm Sandy fueled catastrophe
claims. The company has dropped about 2.8 percent in the past 12
months.

Einhorn also commented on a Bloomberg News article
published yesterday reporting how hedge fund managers can reduce
taxes by directing investments through reinsurers. The article
highlighted John Paulson, whose Bermuda reinsurer has no
employees and sells far less coverage than the industry norm.

Greenlight Re is “a real reinsurance company,” Einhorn
said today. “We have lots of people working in multiple
countries, in the Cayman Islands and in Ireland, actually
reinsuring actual risk in substantial size. And as a result, we
don’t believe that there is any new reason or particular reason
to worry on this topic.”